High returns on financial instruments make them more attractive investments than fixed assets

26 june 2017

Making a presentation on the new facts about the Russian economy at the 6th Conference "Economic Situation in Russia" organized by the Franco-Russian Chamber of Commerce, Analytical Center expert Yekaterina Grigorieva talked about the current macroeconomic trends in the Russian economy and the medium term prospects of economic development in the country.

"In January through March 2017 investments in real terms
were up by 2.3 % on the same period of last year, demonstrating the largest
increase in the past 16 quarters," Ms. Grigorieva said. "The basic drivers of
economic growth included investments in machines and equipment, where we saw
growth not only in imports, which resulted from a stronger rouble, but also in
domestic manufacturing."

According to the experts, the decline in the construction
sector, by contrast, was holding back a recovery in investments. The Russian
Federal Statistics Services reports that Q1 2017 saw a 4.3 % decrease in
construction on an annualized basis.

Ms. Grigorieva, however, believes that the investment figure
begs some questions. It includes investments both by large and medium-sized
organizations, which make up some 80 % of total capital investments, and
investments that are estimated to have occurred in the segment in which the
Federal Statistics Service does not conduct surveys and only makes estimates
for. At the same time, according to the Federal Statistics Service, the real
increase in investments by large and medium-sized organizations calculated on
the basis of statistical surveys of large companies was just 0.4 % in Q1 2017,
while the estimated increase in investments by small companies is reported as
9.6 %.

This means, that according to the Federal Statistics Service
the bulk of investment growth early in the year was happening in the small
business segment (as well as in the segment for which no real statistical
observations are made), which accounted for 22.1 % of the total investments and
which increased by just 4.6 billion roubles in nominal terms, or just 1 %. The
expert believes that all this information suggests that the total increase in
capital investments in Q1 2017 (+2.3 %) could be overestimated and will
probably be revised down at a later point.

"High interest rates are prompting companies to forgo
capital investments in favor of financial instruments," Ms. Grigorieva said.
"It is notable that capital investments in nominal terms increased less than
twofold between 2009 and 2016 while financial investments grew much faster in
the same period, increasing sixfold from 22,745 billion roubles in 2009 to
136,718.9 billion roubles in 2016. As a result the share of capital investments
in total business investments hit a 17-year low of 9.7 % in 2016. At the
current level of returns on financial instruments, capital investments simply
do not make much business sense for many companies."